India Journal: The Mystery of India’s Missing Jobs

According to Harvard University professor David Bloom, the high proportion of working age individuals in East Asia expanded the region’s per capita productivity in the 1970s, leading to high savings rates and ultimately booming economies.

Mr. Bloom reckons that same demographic dynamic — favorable age distribution — can expand India’s economic growth by more than one percentage point per annum in the next 15 years.

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Unless there is a focus on investment-friendly policies, a large section of India’s population will remain unemployed says Nandita Agarwal Parker.

No doubt there is promise in India’s demographic dividend, but the story so far shows we are a long way from reaping the benefits. A look at our recent record of job creation demonstrates just how far. Between 2005 and 2010, India’s economy was galloping at an average annual growth rate of 8.5%, but the expansion in net job creation was a mere two million. During this period, the economy added 27.5 million jobs but that was largely offset by a decline in the number of self-employed people by 25.5 million.

In contrast, in the five-year period between 2000 and 2005, 93 million net new jobs were created, of which 65.5 million were in the self-employed segment.

So where did the job growth go? There are several reasons for the slowdown:

The momentum from construction-related work on roads and highways petered out as the global financial crisis hit India’s shores in 2008, choking off access to global capital markets. Then the textile sector, which is highly labor intensive, slowed as demand for Indian apparel cooled off. Additionally, since the current coalition government was re-elected with a resounding victory in May 2009, there has been a marked socialist tilt in government policy. “Inclusive Growth” – this government’s mandate — has been more about expanding inclusion and less about sustaining growth.

What’s clearly missing is business investment, which would help create millions of jobs. Business confidence is at a two-year low – the latest business confidence survey reading, from the Federation of Indian Chamber of Commerce and Industry, was 51.6. New projects are routinely stalled as they await clearances for environment and land acquisition.

But these reasons don’t explain the fact that the share of manufacturing in the overall economy has been stagnating. Manufacturing accounts for 16% of India’s gross domestic product and 12% of total employment. Output from the sector exceeds that of agriculture, which accounts for 52% of employment. Even before the current crisis, the lack of a flexible labor policy deterred investment in the manufacturing sector. Large-scale employment in manufacturing is costly because of archaic labor laws that prohibit firms from firing employees if they have more than 100 people on their payroll.

Crisil Research estimates that India needs 55 million additional jobs by 2015 just to maintain the current employment-to-population ratio of 39%.

Unless there is a focus on investment-friendly policies, India’s demographic dividend could become an albatross around the government’s neck.

What went wrong? Why is a nation whose Prime Minister Manmohan Singh, a highly-qualified Oxford-educated economist, who as finance minister in the 1990s was considered the father of India’s economic liberalization, suffering from jobless growth and policy malaise? It is easy to say that this is because India is a democracy, or that a coalition government means reforms are a long drawn process. But the real truth may lie elsewhere.

There appears to be no consensus within the leading Congress party about what its economic policies should be. Too many chiefs and not enough Indians!

While the prime minister wears a reformist hat, others pull in different directions. For example, Rahul Gandhi, who holds no formal position in the government but is the Congress party’s heir apparent, appears deeply suspicious of business. He is often seen mingling with the “aam admi” or common man on public buses and trains, but Mr. Gandhi is seldom spotted attending economic summits or industry forums.

With infrastructure projects delayed and inflation sticking around 9%, the “aam admi” is no longer amused.

Even the rising urban middle-class feels increasingly disenfranchised. Higher incomes have raised consumption standards as well as aspirations, with people no longer having the patience to deal with power outages, water shortages and potholes. This widespread frustration was evident in the way people from across diverse regions and all levels of society banded together to support the recent anticorruption movement led by Gandhian activist Anna Hazare.

Highway projects initiated by the previous Bharatiya Janata Party-led National Democratic Alliance government, and far-reaching cellular communications networks built by the private sector, have also united far-flung regions of the country.

The Nehru-Gandhi family would do well to take a lesson from history: The poverty eradication programs undertaken during the 1970s by former Prime Minister Indira Gandhi didn’t accomplish the job creation that has been achieved since economic liberalization.

India’s Cabinet recently approved a National Manufacturing Policy which aims to create 100 million jobs in 10 years through the creation of large manufacturing zones similar to the Chinese model. But the implementation of this policy requires coordination between the state governments and the Center, as well as cooperation between various government ministries. This is where the links break down. Without strong leadership, the status quo will prevail.

The writing is on the wall. India needs one chief and he must stand down the others.

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India Real Time offers analysis and insights into the broad range of developments in business, markets, the economy, politics, culture, sports, and entertainment that take place every single day in the world’s largest democracy. Regular posts from Wall Street Journal and Dow Jones Newswires reporters around the country provide a unique take on the main stories in the news, shed light on what else mattered and why, and give global readers a snapshot of what Indians have been talking about all week. You can contact the editors at indiarealtime(at)wsj(dot)com.